Exhibit 99.2



Management’s Report



Management’s Responsibility on Financial
Statements



Management is responsible for the preparation
of the accompanying consolidated financial statements and for the consistency therewith of all other financial and operating data
presented in this annual report. The consolidated financial statements have been prepared in accordance with the accounting policies
detailed in the notes thereto. In Management’s opinion, the consolidated financial statements are in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, have been prepared within acceptable limits
of materiality, and have utilized supportable, reasonable estimates.



To ensure the integrity of our financial
statements, we carefully select and train qualified personnel. We also ensure our organizational structure provides appropriate
delegation of authority and division of responsibilities. Our policies and procedures are communicated throughout the organization
including a written ethics and integrity policy that applies to all employees including the chief executive officer and chief financial
officer.



The Board of Directors approves the consolidated
financial statements. Their financial statement related responsibilities are fulfilled mainly through the Audit Committee. The
Audit Committee is composed entirely of independent directors, and includes at least one director with financial expertise. The
Audit Committee meets regularly with management and the external auditors to discuss reporting and control issues and ensures each
party is properly discharging its responsibilities. The Audit Committee also considers the independence of the external auditors
and reviews their fees.



The consolidated financial statements have
been audited by Deloitte LLP, Independent Registered Chartered Accountants, in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board (United States) on behalf of the shareholders.



Management’s Report on Internal
Control over Financial Reporting



Management is responsible for establishing
and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a
process designed to provide reasonable assurance that all assets are safeguarded, transactions are appropriately authorized and
to facilitate the preparation of relevant, reliable and timely information. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s
internal control over financial reporting as defined in Rule 13a-15 under the US Securities Exchange Act of 1934. The assessment
was based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Management concluded that the Company’s internal control over financial reporting was effective
as of December 31, 2012. The Company’s internal control over financial reporting as of December 31, 2012 has been audited
by Deloitte LLP, the Company’s Independent Registered Chartered Accountants, who also audited the Company’s consolidated
financial statements for the year ended December 31, 2012.



|(signed)                              |  | (signed)                                         
|------------------------------------- |  | -------------------------------------------------
|                                      |  |                                                  
|Myron M. Stadnyk                      |  | Steven W. Sinclair                               
|President and Chief Executive Officer |  | Senior Vice-President and Chief Financial Officer
|                                      |  |                                                  
|Calgary, Alberta                      |  |                                                  
|February 6, 2013                      |  |                                                  











REPORT OF INDEPENDENT
REGISTERED CHARTERED ACCOUNTANTS



To the Board of Directors and Shareholders
of ARC Resources Ltd.



We have audited the accompanying consolidated
financial statements of ARC Resources Ltd. and subsidiaries, which comprise the consolidated balance sheets as at December 31,
2012 and December 31, 2011 and the consolidated statements of income, statements of comprehensive income, statements of changes
in shareholders’ equity and statements of cash flows for the years then ended, and a summary of significant accounting policies
and other explanatory information.



Management's Responsibility for the Consolidated
Financial Statements



Management is responsible for the preparation
and fair presentation of theseconsolidated financial statements in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary
to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.



Auditor's Responsibility



Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.



An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend
on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.



We believe that the audit evidence we have
obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.



Opinion



In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of ARC Resources Ltd.and subsidiaries as at
December 31, 2012 and December 31, 2011 and their financial performance and cash flows for the years then ended in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board.



Other Matter



We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), ARC Resources Ltd.’s internal control over
financial reporting as of December 31, 2012, based on the criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 6, 2013 expressed
an unqualified opinion on the Company’s internal control over financial reporting.



(signed) “Deloitte LLP”

Independent Registered Chartered Accountants

February 6, 2013

Calgary, Canada











REPORT OF INDEPENDENT REGISTERED CHARTERED
ACCOUNTANTS



To the Board of Directors and Shareholders
of ARC Resources Ltd.



We have audited the internal control over
financial reporting of ARC Resources Ltd.and subsidiaries (the “Company”)as
of December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.



We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A company's internal control over financial
reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers,
or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal
control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established
in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with
Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated February
6, 2013 expressed an unqualified opinion on those financial statements.



(signed) “Deloitte LLP”

Independent Registered Chartered Accountants

February 6, 2013

Calgary, Canada











CONSOLIDATED BALANCE SHEETS

As at

|                                                      |  |                   |         |   |                   |  
|----------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|(Cdn$ millions)                                       |  | December 31, 2012 |         |   | December 31, 2011 |  
|ASSETS                                                |  |                   |         |   |                   |  
|Current assets                                        |  |                   |         |   |                   |  
|Cash and cash equivalents (Note 6)                    |  | $                 | 194.6   |   |                   | $
|Short-term investment                                 |  |                   | 1.7     |   |                   |  
|Accounts receivable                                   |  |                   | 164.3   |   |                   |  
|Prepaid expenses                                      |  |                   | 13.1    |   |                   |  
|Risk management contracts (Note 15)                   |  |                   | 30.9    |   |                   |  
|Assets held for sale (Note 10)                        |  |                   | 0.3     |   |                   |  
|                                                      |  |                   | 404.9   |   |                   |  
|Reclamation funds (Note 8)                            |  |                   | 29.8    |   |                   |  
|Risk management contracts (Note 15)                   |  |                   | 1.7     |   |                   |  
|Property, plant and equipment (Note 10)               |  |                   | 4,704.4 |   |                   |  
|Intangible exploration and evaluation assets (Note 9) |  |                   | 238.1   |   |                   |  
|Goodwill                                              |  |                   | 248.2   |   |                   |  
|Total assets                                          |  | $                 | 5,627.1 |   |                   | $
|                                                      |  |                   |         |   |                   |  
|LIABILITIES                                           |  |                   |         |   |                   |  
|Current liabilities                                   |  |                   |         |   |                   |  
|Accounts payable and accrued liabilities              |  | $                 | 301.0   |   |                   | $
|Current portion of long-term debt (Note 12)           |  |                   | 39.7    |   |                   |  
|Dividends payable                                     |  |                   | 30.9    |   |                   |  
|Risk management contracts (Note 15)                   |  |                   | 0.5     |   |                   |  
|Liabilities associated with assets held for sale      |  |                   | 1.3     |   |                   |  
|                                                      |  |                   | 373.4   |   |                   |  
|Risk management contracts (Note 15)                   |  |                   | 10.3    |   |                   |  
|Long-term debt (Note 12)                              |  |                   | 747.7   |   |                   |  
|Long-term incentive compensation liability (Note 18)  |  |                   | 24.5    |   |                   |  
|Other deferred liabilities                            |  |                   | 19.3    |   |                   |  
|Asset retirement obligations (Note 13)                |  |                   | 532.9   |   |                   |  
|Deferred taxes (Note 16)                              |  |                   | 522.3   |   |                   |  
|Total liabilities                                     |  |                   | 2,230.4 |   |                   |  
|                                                      |  |                   |         |   |                   |  
|COMMITMENTS AND CONTINGENCIES (Note 19)               |  |                   |         |   |                   |  
|                                                      |  |                   |         |   |                   |  
|SHAREHOLDERS’ EQUITY                                  |  |                   |         |   |                   |  
|Shareholders’ capital (Note 17)                       |  |                   | 3,670.2 |   |                   |  
|Contributed surplus                                   |  |                   | 1.7     |   |                   |  
|Deficit                                               |  |                   | (275.2  | ) |                   |  
|Total shareholders’ equity                            |  |                   | 3,396.7 |   |                   |  
|Total liabilities and shareholders’ equity            |  | $                 | 5,627.1 |   |                   | $



See accompanying notes to the Consolidated Financial Statements



Approved by the Board of Directors



|(signed)                                        |  | (signed)                                 
|----------------------------------------------- |  | -----------------------------------------
|Mac H. Van Wielingen                            |  | Kathleen M. O’Neill                      
|Chairman of the Board of Directors and Director |  | Chair of the Audit Committee and Director











CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31



|(Cdn$ millions, except per share amounts)                          |  | 2012 |         |   | 2011 |  
|------------------------------------------------------------------ |  | ---- | ------- | - | ---- | -
|                                                                   |  |      |         |   |      |  
|Sales of crude oil, natural gas and natural gas liquids            |  | $    | 1,389.4 |   |      | $
|Royalties                                                          |  |      | (195.7  | ) |      |  
|REVENUE                                                            |  |      | 1,193.7 |   |      |  
|                                                                   |  |      |         |   |      |  
|Gain on risk management contracts (Note 15)                        |  |      | 80.6    |   |      |  
|                                                                   |  |      | 1,274.3 |   |      |  
|                                                                   |  |      |         |   |      |  
|EXPENSES                                                           |  |      |         |   |      |  
|Transportation                                                     |  |      | 44.1    |   |      |  
|Operating                                                          |  |      | 321.8   |   |      |  
|General and administrative                                         |  |      | 97.1    |   |      |  
|Interest and financing charges                                     |  |      | 45.3    |   |      |  
|Accretion of asset retirement obligation (Note 13)                 |  |      | 12.4    |   |      |  
|Depletion, depreciation, amortization and impairment (Note 10)     |  |      | 571.1   |   |      |  
|(Gain) loss on foreign exchange                                    |  |      | (7.3    | ) |      |  
|Loss on short-term investments                                     |  |      | 1.6     |   |      |  
|Gain on disposal of petroleum and natural gas properties (Note 10) |  |      | (0.2    | ) |      |  
|                                                                   |  |      | 1,085.9 |   |      |  
|Provision for income taxes (Note 16)                               |  |      |         |   |      |  
|Current                                                            |  |      | 29.9    |   |      |  
|Deferred                                                           |  |      | 19.3    |   |      |  
|                                                                   |  |      | 49.2    |   |      |  
|                                                                   |  |      |         |   |      |  
|Net income                                                         |  | $    | 139.2   |   |      | $
|                                                                   |  |      |         |   |      |  
|Net income per share (Note 17)                                     |  |      |         |   |      |  
|Basic                                                              |  | $    | 0.47    |   |      | $
|Diluted                                                            |  | $    | 0.47    |   |      | $



See accompanying notes to the Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31



|(Cdn$ millions)                                                           |  | 2012 |       |  | 2011 |  
|------------------------------------------------------------------------- |  | ---- | ----- |  | ---- | -
|                                                                          |  |      |       |  |      |  
|Net income                                                                |  | $    | 139.2 |  |      | $
|                                                                          |  |      |       |  |      |  
|Other comprehensive income, net of tax                                    |  |      |       |  |      |  
|Net unrealized gains on available-for-sale reclamation funds’ investments |  |      | -     |  |      |  
|Other comprehensive income                                                |  |      | -     |  |      |  
|Comprehensive income                                                      |  | $    | 139.2 |  |      | $



See accompanying notes to the Consolidated Financial Statements











CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY

For the years ended December 31



(Cdn$ millions)

|                                                            |  | Shareholders’ capital |         |   | Contributed surplus |   |     | Deficit |  |   | Accumulated other comprehensive loss |   |  | Total
shareholders’
equity |     
|----------------------------------------------------------- |  | --------------------- | ------- | - | ------------------- | - | --- | ------- |  | - | ------------------------------------ | - |  | -------------------------- | ----
|December 31, 2010                                           |  | $                     | 3,112.5 |   |                     | $ | -   |         |  | $ | -                                    |   |  | $                          | (0.1
|Shares issued for cash                                      |  |                       | 1.6     |   |                     |   | -   |         |  |   | -                                    |   |  |                            | -   
|Shares issued pursuant to the dividend reinvestment program |  |                       | 104.2   |   |                     |   | -   |         |  |   | -                                    |   |  |                            | -   
|Share option expense                                        |  |                       | -       |   |                     |   | 0.5 |         |  |   | -                                    |   |  |                            | -   
|Comprehensive income                                        |  |                       | -       |   |                     |   | -   |         |  |   | 287.0                                |   |  |                            | 0.1 
|Dividends declared                                          |  |                       | -       |   |                     |   | -   |         |  |   | (344.0                               | ) |  |                            | -   
|December 31, 2011                                           |  | $                     | 3,218.3 |   |                     | $ | 0.5 |         |  | $ | (57.0                                | ) |  | $                          | -   
|Shares issued for cash                                      |  |                       | 346.2   |   |                     |   | -   |         |  |   | -                                    |   |  |                            | -   
|Shares issued pursuant to the dividend reinvestment program |  |                       | 116.3   |   |                     |   | -   |         |  |   | -                                    |   |  |                            | -   
|Share issue costs (1)                                       |  |                       | (10.6   | ) |                     |   | -   |         |  |   | -                                    |   |  |                            | -   
|Share option expense                                        |  |                       | -       |   |                     |   | 1.2 |         |  |   | -                                    |   |  |                            | -   
|Comprehensive income                                        |  |                       | -       |   |                     |   | -   |         |  |   | 139.2                                |   |  |                            | -   
|Dividends declared                                          |  |                       | -       |   |                     |   | -   |         |  |   | (357.4                               | ) |  |                            | -   
|December 31, 2012                                           |  | $                     | 3,670.2 |   |                     | $ | 1.7 |         |  | $ | (275.2                               | ) |  | $                          | -   



| | (1) | Amount is net of deferred tax of $3.7 million.
| | --- | ----------------------------------------------



See accompanying notes to the Consolidated Financial Statements











CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31



|(Cdn$ millions)                                                    |  | 2012 |        |   | 2011 |  
|------------------------------------------------------------------ |  | ---- | ------ | - | ---- | -
|                                                                   |  |      |        |   |      |  
|CASH FLOW FROM OPERATING ACTIVITIES                                |  |      |        |   |      |  
|Net income                                                         |  | $    | 139.2  |   |      | $
|Add items not involving cash:                                      |  |      |        |   |      |  
|Unrealized (gain) loss on risk management contracts (Note 15)      |  |      | (14.2  | ) |      |  
|Accretion of asset retirement obligation                           |  |      | 12.4   |   |      |  
|Depletion, depreciation, amortization and impairment               |  |      | 571.1  |   |      |  
|Unrealized (gain) loss on foreign exchange                         |  |      | (8.2   | ) |      |  
|Gain on disposal of petroleum and natural gas properties           |  |      | (0.2   | ) |      |  
|Deferred tax expense                                               |  |      | 19.3   |   |      |  
|Other (Note 21)                                                    |  |      | 0.4    |   |      |  
|Net change in other liabilities (Note 21)                          |  |      | (10.6  | ) |      |  
|Change in non-cash working capital (Note 21)                       |  |      | (5.7   | ) |      |  
|                                                                   |  |      | 703.5  |   |      |  
|                                                                   |  |      |        |   |      |  
|CASH FLOW FROM FINANCING ACTIVITIES                                |  |      |        |   |      |  
|Repayment of long-term debt under revolving                        |  |      |        |   |      |  
|credit facilities, net                                             |  |      | (324.2 | ) |      |  
|Issue of Senior Notes (Note 12)                                    |  |      | 397.8  |   |      |  
|Repayment of Senior Notes                                          |  |      | (39.6  | ) |      |  
|Issue of common shares (Note 17)                                   |  |      | 346.2  |   |      |  
|Share issue costs (Note 17)                                        |  |      | (14.3  | ) |      |  
|Cash dividends paid                                                |  |      | (239.1 | ) |      |  
|                                                                   |  |      | 126.8  |   |      |  
|                                                                   |  |      |        |   |      |  
|CASH FLOW FROM INVESTING ACTIVITIES                                |  |      |        |   |      |  
|Acquisition of petroleum and natural gas properties                |  |      | (33.7  | ) |      |  
|Disposals of petroleum and natural gas properties                  |  |      | 1.1    |   |      |  
|Property, plant and equipment development expenditures             |  |      | (557.3 | ) |      |  
|Exploration and evaluation expenditures                            |  |      | (50.4  | ) |      |  
|Net reclamation fund contributions                                 |  |      | (2.8   | ) |      |  
|Change in non-cash working capital (Note 21)                       |  |      | 6.9    |   |      |  
|                                                                   |  |      | (636.2 | ) |      |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                   |  |      | 194.1  |   |      |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                     |  |      | 0.5    |   |      |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                           |  | $    | 194.6  |   |      | $
|The following are included in cash flow from operating activities: |  |      |        |   |      |  
|Income taxes paid in cash                                          |  | $    | -      |   |      | $
|Interest paid in cash                                              |  | $    | 30.0   |   |      | $



See accompanying notes to the Consolidated Financial Statements











NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2012 and December 31, 2011

(all tabular amounts in Cdn$ millions, except
per share amounts)



| | 1. | STRUCTURE OF THE BUSINESS
| | -- | -------------------------



The principal undertakings of
ARC Resources Ltd. and its subsidiaries (collectively the “Company” or “ARC”) are to carry on the business
of acquiring, developing and holding interests in petroleum and natural gas properties and assets.



ARC’s principal place of
business is located at 1200, 308 – 4th Avenue SW, Calgary, Alberta, Canada T2P 0H7.



| | 2. | BASIS OF PREPARATION
| | -- | --------------------



The consolidated financial statements
(the “financial statements”) are presented under International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board and were prepared using accounting policies consistent with IFRS. A summary
of ARC’s significant accounting policies under IFRS is presented in Note 3.



The financial statements include
the accounts of ARC and its wholly owned subsidiaries, ARC Resources General Partnership and 1504793 Alberta Ltd. Any reference
to the “Company” or “ARC” throughout these financial statements refers to the Company and its subsidiaries.
All inter-entity transactions have been eliminated.



The financial statements have
been prepared on the historical cost basis with the exception of the following which are measured at fair value:



| | · | available-for-sale financial assets
| | - | -----------------------------------

| | · | short-term investments; and
| | - | ---------------------------

| | · | derivative financial instruments.
| | - | ---------------------------------



These financial statements were
authorized for issue by the Board of Directors on February 6, 2013.



| | 3. | SUMMARY OF ACCOUNTING POLICIES
| | -- | ------------------------------



Revenue Recognition

Revenue associated with the sale
of crude oil, natural gas, and natural gas liquids (“NGLs”) owned by ARC is recognized when title is transferred from
ARC to its customers. Revenue is measured at the fair value of the consideration received or receivable. Revenue from the sale
of crude oil, natural gas, and NGLs (prior to deduction of transportation costs) is recognized when all of the following conditions
have been satisfied:

| | • | ARC has transferred the significant risks and rewards of ownership of the goods to the buyer;
| | - | ---------------------------------------------------------------------------------------------

| | • | ARC retains no continuing managerial involvement to the degree usually associated with ownership
or effective control over the goods sold;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| | • | the amount of revenue can be measured reliably;
| | - | -----------------------------------------------

| | • | it is probable that the economic benefits associated with the transaction will flow to ARC; and
| | - | -----------------------------------------------------------------------------------------------

| | • | the costs incurred or to be incurred in respect of the transaction can be measured reliably.
| | - | --------------------------------------------------------------------------------------------



Revenue is presented net of
royalties accrued.



Transportation

Costs paid by ARC for the transportation
of natural gas, crude oil and NGLs from the wellhead to the point of title transfer are recognized when the transportation is provided.



Joint Interests

ARC conducts many of its oil
and gas production activities through jointly controlled assets and the financial statements reflect only ARC’s proportionate
interest in such activities.











Long-Term Incentive Plans

Restricted Share Unit &
Performance Share Unit and Deferred Share Unit Plans

ARC has established a cash-settled
Restricted Share Unit & Performance Share Unit Plan (“RSU & PSU Plan”) for employees, independent directors
and long-term consultants who otherwise meet the definition of an employee of ARC as well as a Deferred Share Unit Plan (“DSU
Plan”) for non-employee directors. Compensation expense associated with the RSU & PSU Plan and the DSU Plan is granted
in the form of Restricted Share Units (“RSUs”), Performance Share Units (“PSUs”) and Deferred Share Units
(“DSUs”) and is determined based on the fair value of the share units at grant date and is subsequently adjusted to
reflect the fair value of the share units at each period end. This valuation incorporates the period-end share price, the number
of RSUs, PSUs and DSUs outstanding at each period end, and certain management estimates. As a result, large fluctuations in compensation
expense may occur due to changes in the underlying share price or revised estimates of relevant performance factors. In addition,
compensation expense is amortized and recognized in earnings over the relevant service period of the RSU & PSU Plan and DSU
Plan with a corresponding increase or decrease in liabilities. Classification between accrued liabilities and accrued long-term
incentive compensation liability is dependent on the expected payout date.



Share Option Plan

ARC has established a share option
plan for certain employees and consultants. The fair value of share options issued to employees is determined on their grant date
using a valuation model and recorded as compensation expense over the period that the share options vest, with a corresponding
increase to contributed surplus. The exercise price of the share options granted may be reduced by the amount of dividends declared
in future periods in accordance with the terms of the plan. Forfeitures are estimated through the vesting period based on past
experience and future expectations, and adjusted upon actual vesting. When share options are exercised, the proceeds, together
with the amounts recorded in contributed surplus, are recorded in shareholders’ capital. No share options have been issued
to consultants to date.



Cash Equivalents

Cash equivalents include market
deposits and similar type instruments, with an original maturity of three months or less when purchased.



Reclamation Funds

Reclamation funds hold investment
grade assets and cash and cash equivalents. Investments are categorized as available-for-sale assets. Available-for-sale assets
are initially measured at fair value with subsequent changes in fair value recognized in other comprehensive income, net of tax.



Goodwill

ARC records goodwill relating
to a business combination when the total purchase price exceeds the fair value of the identifiable assets and liabilities of the
acquired company. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is evaluated for impairment on an
annual basis, or more frequently if potential indicators of impairment exist.



Intangible Exploration
and Evaluation Assets (“E&E”)

Intangible exploration and evaluation
costs are capitalized until the technical feasibility and commercial viability, or otherwise, of the relevant projects have been
determined. E&E costs may include costs of license acquisition, technical services and studies, and exploration drilling and
testing. Tangible assets acquired which are consumed in developing an intangible exploration asset are recorded as part of the
cost of the intangible exploration asset.



If an E&E project is determined
to be unsuccessful, all associated costs are charged to the statement of income at that time.



If commercial reserves are established
for a project classified as E&E, the relevant cost is transferred from E&E to development and production assets which are
classified as property, plant and equipment on the consolidated balance sheet. Assets are reviewed for impairment prior to any
such transfer.



Assets classified as E&E
are not amortized.



Costs incurred prior to obtaining
the legal right to explore are expensed as incurred.











Property, Plant and Equipment
(“PP&E”)

Items of PP&E, which include
oil and gas development and production assets and administrative assets, are measured at cost less accumulated depletion, depreciation
and amortization and accumulated impairment losses.



Gains and losses on disposal
of an item of PP&E are determined by comparing the proceeds from disposal with the carrying amount of PP&E and are recognized
separately in the statement of income.



Exchanges of properties are measured
at fair value, unless the transaction lacks commercial substance or fair value cannot be reasonably measured. Where the exchange
is measured at fair value, a gain or loss is recognized in the statement of income.



Overhead costs which are directly
attributable to bringing an asset to the location and condition necessary for it to be capable of use in the manner intended by
management are capitalized. These costs include compensation costs paid to internal personnel dedicated to capital projects.



Depletion, Depreciation and
Amortization

Development and production assets
are componentized into groups of assets with similar useful lives for the purposes of performing depletion calculations. Depletion
expense is calculated on the unit-of-production basis based on:



| | (a) | total estimated proved and probable reserves calculated in accordance with Ontario Securities Commission’s
National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                           

| | (b) | total capitalized costs plus estimated future development costs of proved and probable reserves,
including future estimated asset retirement costs; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                        

| | (c) | relative volumes of petroleum and natural gas reserves and production, before royalties, converted
at the energy equivalent conversion ratio of six thousand cubic feet of natural gas to one barrel of oil.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Depreciation of corporate assets
is calculated on a straight-line basis over the useful life of the related assets.



Impairment

Development and Production Assets

ARC’s development and production
assets are grouped into cash generating units (“CGUs”) for the purpose of assessing impairment. A CGU is a grouping
of assets that generate cash inflows independently of other assets held by the Company. Geological formation, product type, geography
and internal management are key factors considered when grouping ARC’s oil and gas assets into CGUs.



CGUs are reviewed at each reporting
date for indicators of potential impairment. If such indicators exist, an impairment test is performed by comparing the CGU’s
carrying value to its recoverable amount, defined as the greater of a CGU’s fair value less cost to sell and its current
value in use. Any excess of carrying value over recoverable amount is recognized in the statement of income as an impairment charge,
included within depletion, depreciation and amortization.



If there is an indicator that
a previously recognized impairment charge may no longer be valid, the recoverable amount of the relevant CGU is calculated and
compared against the carrying amount. An impairment charge is reversed to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of depletion, if no impairment loss had been recognized.



E&E, Administrative
Assets and Goodwill

E&E, administrative assets
and goodwill are assessed for impairment at the operating segment level. Goodwill has not been attributed to individual CGUs as
ARC believes the goodwill it has acquired enhances the value of all of its pre-existing CGUs through enhanced operating efficiencies.
Impairment tests are carried out when E&E assets are transferred to development and production assets following the declaration
of commercial reserves, and any time that circumstances arise which could indicate a potential impairment. Irrespective of whether
there is any indication of impairment, goodwill balances are tested for impairment annually. An impairment loss is recognized if
the total carrying values of E&E, administrative assets and goodwill exceed the aggregate impairment cushions calculated for
each of ARC’s CGUs and is applied first to reduce the carrying amount of goodwill and then to E&E and administrative
assets on a pro-rata basis. Any impairment loss of goodwill is not reversed.











If E&E, administrative assets
and goodwill are subject to impairment testing in the same period in which there is an indication of impairment in one of ARC’s
CGUs, that CGU is first tested for impairment and any resulting impairment loss is recorded prior to conducting impairment tests
on assets at the operating segment level.



Assets Held for
Sale

Non-current assets are classified
as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This
condition is met when the sale is highly probable and the asset is available for immediate sale in its present condition. For the
sale to be highly probable, management must be committed to a plan to sell the asset and an active program to locate a buyer and
complete the plan must have been initiated. The asset must be actively marketed for sale at a price that is reasonable in relation
to its current fair value and the sale should be expected to be completed within one year from the date of classification.



Non-current assets classified
as held for sale are measured at the lower of the carrying amount and fair value less costs to sell, with impairments recognized
in the consolidated statement of income in the period measured. Non-current assets held for sale are presented in current assets
and liabilities within the consolidated balance sheet. Assets held for sale are not depleted, depreciated or amortized.



Asset Retirement
Obligations

ARC recognizes an asset retirement
obligation (“ARO”) in the period in which it has a present legal or constructive liability and a reasonable estimate
of the amount can be made. On a periodic basis, management reviews these estimates and changes, if any, are applied prospectively.
The fair value of the estimated ARO is recorded as a long-term liability, with a corresponding increase to the carrying amount
of the related asset. The capitalized amount is depreciated on a unit-of-production basis over the life of the associated proved
plus probable reserves. The long-term liability is increased each reporting period with the passage of time and the associated
accretion charge is recognized in earnings. Periodic revisions to the liability specific discount rate, estimated timing of cash
flows or to the original estimated undiscounted cost can also result in an increase or decrease to the ARO. Actual costs incurred
upon settlement of the obligation are recorded against the ARO to the extent of the liability recorded.



Deferred Taxes

Deferred tax is recognized using
the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be
applied to temporary differences when they reverse, based on the laws that have been substantively enacted by the reporting date.



Deferred income tax expense is
recognized in the statement of income except to the extent that it relates to items recognized directly in equity, in which case
it is recognized in equity.



Deferred tax assets and tax liabilities
are offset to the extent there is a legally enforcable right to set off the recognized amounts and the intent is to either settle
on a net basis or to realize the asset and settle the liability simultaneously.



Financial Instruments

Financial assets, financial liabilities
and derivatives are measured at fair value on initial recognition. Measurement in subsequent periods depends on the financial instrument’s
classification, as described below.



a. Fair value through profit
and loss

Financial assets and liabilities
designated as fair value through profit and loss are subsequently measured at fair value with changes in those fair values charged
immediately to earnings. ARC classifies all risk management contracts and short-term investments as fair value through profit and
loss. Cash and cash equivalents are also classified as fair value through profit and loss.



b. Available-for-sale assets

Available-for-sale financial assets
are subsequently measured at fair value with changes in fair value recognized in Other Comprehensive Income (“OCI”),
net of tax. Amounts recognized in OCI for available-for-sale financial assets are charged to earnings when the asset is derecognized
or when there is a significant or prolonged decrease in the value of the asset. ARC classifies its reclamation fund assets as available-for-sale
assets. Transaction costs related to the purchase of available-for-sale assets are recognized in the statement of income.











c. Held-to-maturity investments,
loans and receivables and other financial liabilities

Held-to-maturity investments,
loans and receivables, and other financial liabilities are subsequently measured at amortized cost using the effective interest
method. ARC classifies accounts receivable as loans and receivables, and accounts payable and accrued liabilities, long-term incentive
compensation liability, dividends payable and long-term debt as other financial liabilities.



Foreign Currency
Translation

Monetary assets and liabilities
denominated in a foreign currency are translated at the rate of exchange in effect at the consolidated balance sheet date. Revenues
and expenses are translated at the period average rates of exchange. Translation gains and losses are included in earnings in the
period in which they arise.



ARC’s functional and presentation
currency is Canadian dollars.



| | 4. | NEW ACCOUNTING POLICIES
| | -- | -----------------------



Future Accounting Changes

ARC has reviewed new and revised
accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact
on the Company:



In May 2011, the IASB released
the following new standards: IFRS 10, “Consolidated Financial Statements”, IFRS 11, “Joint Arrangements”,
IFRS 12, “Disclosures of Interests in Other Entities” and IFRS 13, “Fair Value Measurement”. Each of these
standards is to be adopted for fiscal years beginning January 1, 2013 with earlier adoption permitted. A brief description of each
new standard follows below:



| | · | IFRS 10, “Consolidated Financial
Statements” supercedes IAS 27 “Consolidation and Separate Financial Statements” and SIC-12 “Consolidation
– Special Purpose Entities”. This standard provides a single model to be applied in control analysis for all investees
including special purpose entities. The adoption of this standard is not expected to have any impact on ARC’s financial statements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IFRS 11, “Joint Arrangements”
divides joint arrangements into two types, joint operations and joint ventures, each with their own accounting model. All joint
arrangements are required to be reassessed on transition to IFRS 11 to determine their type to apply the appropriate accounting.
The adoption of this standard is not expected to have any impact on ARC’s financial statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IFRS 12, “Disclosure of Interests
in Other Entities” combines in a single standard the disclosure requirements for subsidiaries, associates and joint arrangements
as well as unconsolidated structured entities. The adoption of this standard is not expected to have a material impact on ARC’s
financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | IFRS 13, “Fair Value Measurement”
defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements.
This standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The adoption of this standard is expected to require the revaluation
of certain derivative financial liabilities on ARC’s balance sheet to reflect an appropriate amount of risk of non-performance
by ARC. ARC does not expect this revaluation to be material to its financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of January 1, 2015 , ARC will
be required to adopt IFRS 9 “Financial Instruments”, which is the result of the first phase of the International Accounting
Standards Board (“IASB”) project to replace IAS 39 “Financial Instruments: Recognition and Measurement”.
The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with
a single model that has only two classification categories: amortized cost and fair value. Portions of the standard remain in development
and the full impact of the standard on ARC’s Consolidated Financial Statements will not be known until the project is complete.



| | 5. | MANAGEMENT JUDGMENTS AND ESTIMATION UNCERTAINTY
| | -- | -----------------------------------------------



The preparation of financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingencies at the date of the financial statements, and revenues and expenses during the reporting year. Actual
results could differ from those estimated. The key sources of estimation uncertainty that have a significant risk of causing material
adjustment to the carrying amounts of assets and liabilities are discussed below.











Recoverability of Asset Carrying
Values

The recoverability of development
and production asset carrying values are assessed at the CGU level. Determination of what constitutes a CGU is subject to management
judgments. The asset composition of a CGU can directly impact the recoverability of the assets included therein. In assessing the
recoverability of oil and gas properties, each CGU’s carrying value is compared to its recoverable amount, defined as the
greater of its fair value less cost to sell and value in use.



At December 31, 2012 the recoverable
amounts of ARC’s CGUs were estimated as their fair value less cost to sell based on the following information:



| | i) | the net present value of the after-tax cash flows from oil and gas reserves of each CGU based on
reserves estimated by ARC’s independent reserve evaluator; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) | the fair value of undeveloped land based on estimates provided by ARC’s independent land
evaluator
| | --- | --------------------------------------------------------------------------------------------------



with consideration given to acquisition
metrics of recent transactions completed on similar assets to those contained within the relevant CGU.



Key input estimates used in the
determination of cash flows from oil and gas reserves include the following:



| | a) | Reserves – Assumptions that are valid at the time of reserve estimation may change significantly
when new information becomes available. Changes in forward price estimates, production costs or recovery rates may change the economic
status of reserves and may ultimately result in reserves being restated.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Oil and natural gas prices – Forward price estimates of the oil and natural gas prices are
used in the cash flow model. Commodity prices have fluctuated widely in recent years due to global and regional factors including
supply and demand fundamentals, inventory levels, exchange rates, weather, economic and geopolitical factors.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Discount rate – The discount rate used to calculate the net present value of cash flows is
based on estimates of an approximate industry peer group weighted average cost of capital. Changes in the general economic environment
could result in significant changes to this estimate.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of a reduced forward
commodity price outlook for natural gas and widening price differentials for crude oil, impairment tests were carried out at December
31, 2012 and were based on fair value less costs to sell calculations, using an after-tax discount rate of 10 per cent and the
following forward commodity price estimates:



|Year      |  | Edmonton Light Crude Oil (Cdn$/bbl)(1) |                |  | WTI Oil (US$/bbl)(1) |  |                | AECO Gas (Cdn$/mmbtu)(1) |  |  | Cdn$/US$ Exchange Rates(1) | 
|--------- |  | -------------------------------------- | -------------- |  | -------------------- |  | -------------- | ------------------------ |  |  | -------------------------- | 
|2013      |  |                                        | 85.00          |  |                      |  | 90.00          |                          |  |  | 3.38                       | 
|2014      |  |                                        | 91.50          |  |                      |  | 92.50          |                          |  |  | 3.83                       | 
|2015      |  |                                        | 94.00          |  |                      |  | 95.00          |                          |  |  | 4.28                       | 
|2016      |  |                                        | 96.50          |  |                      |  | 97.50          |                          |  |  | 4.72                       | 
|2017      |  |                                        | 96.50          |  |                      |  | 97.50          |                          |  |  | 4.95                       | 
|2018      |  |                                        | 96.50          |  |                      |  | 97.50          |                          |  |  | 5.22                       | 
|2019      |  |                                        | 97.54          |  |                      |  | 98.54          |                          |  |  | 5.32                       | 
|2020      |  |                                        | 99.51          |  |                      |  | 100.51         |                          |  |  | 5.43                       | 
|2021      |  |                                        | 101.52         |  |                      |  | 102.52         |                          |  |  | 5.54                       | 
|2022      |  |                                        | 103.57         |  |                      |  | 104.57         |                          |  |  | 5.64                       | 
|Remainder |  |                                        | +2.0% per year |  |                      |  | +2.0% per year |                          |  |  | +2.0% per year             | 



| | (1) | Source: GLJ Petroleum Consultants price forecast, effective January 1, 2013.
| | --- | ----------------------------------------------------------------------------



For the year ended December 31,
2012, ARC recorded an impairment of $53 million for the Southern Alberta Southwest Saskatchewan CGU. A one per cent increase in
the assumed discount rate would result in an additional impairment for this CGU of $14.8 million, while a five per cent decrease
in the forward commodity price estimate would result in an additional impairment of approximately $29.1 million.



For the year ended December 31,
2011, ARC recorded an impairment charge (net of recoveries of $28.4 million) of $71.9 million. The net impairment loss was recorded
in the Southern Alberta and Southwest Saskatchewan CGU.



The carrying value of goodwill
at December 31, 2012 is $248.2 million. This value is supported by the combined excess recoverable amount over the current carrying
value of ARC’s operating segment.











Depletion of Oil and Gas Assets

Depletion of oil and gas assets
is determined based on total proved and probable reserve values as well as future development costs as estimated by ARC’s
external reserve evaluator. See (a) above for discussion of estimates and judgments involved in reserve estimation.



Asset Retirement Obligation

The provision for site restoration
and abandonment is based on current legal and constructive requirements, technology, price levels and expected plans for remediation.
Actual costs and cash outflows can differ from estimates because of changes in laws and regulations, public expectations, market
conditions, discovery and analysis of site conditions and changes in technology.



Derivative Instruments

The estimated fair value of derivative
instruments resulting in financial assets and liabilities is reliant upon a number of estimated variables including forward commodity
prices, foreign exchange rates and interest rates, volatility curves and risk of non-performance. A change in any one of these
factors could result in a change to the overall estimated valuation of the instrument.



Employee Compensation Costs

Compensation expense accrued
for ARC’s Performance Share Unit Plan is dependent on an adjustment to the final number of PSU awards that eventually vest
based on a performance multiplier. The determination of the performance multiplier is subject to management estimation.



Compensation expense recorded
for ARC’s Share Option Plan is based on a binomial-lattice option pricing model. The inputs to this model rely on management
judgment.



| | 6. | CASH AND CASH EQUIVALENTS
| | -- | -------------------------



The cash balance of $194.6 million
at December 31, 2012 and $0.5 million at December 31, 2011 was held in investment grade assets.



| | 7. | FINANCIAL ASSETS AND CREDIT RISK
| | -- | --------------------------------



Credit risk is the risk of financial
loss to ARC if a partner or counterparty to a product sales contract or financial instrument fails to meet its contractual obligations.
ARC is exposed to credit risk with respect to its cash equivalents, short-term investments, accounts receivable, reclamation fund,
and risk management contracts. Most of ARC’s accounts receivable relate to oil and natural gas sales and are subject to typical
industry credit risks.  ARC manages this credit risk as follows:



| | · | By entering into sales contracts with only
established creditworthy counterparties as verified by a third party rating agency, through internal evaluation or by requiring
security such as letters of credit;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | By limiting exposure to any one counterparty
in accordance with ARC’s credit policy; and
| | - | ----------------------------------------------------------------------------------------

| | · | By restricting cash equivalent investments,
reclamation fund investments, and risk management transactions to counterparties that, at the time of transaction, are not less
than investment grade.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The majority of the credit exposure
on accounts receivable at December 31, 2012 pertains to accrued revenue for December 2012 production volumes.  ARC transacts
with a number of oil and natural gas marketing companies and commodity end users (“commodity purchasers”). Commodity
purchasers and marketing companies typically remit amounts to ARC by the 25th day of the month following production.
Joint interest receivables are typically collected within one to three months following production. At December 31, 2012, no one
counterparty accounted for more than 25 per cent of the total accounts receivable balance.



ARC’s allowance for doubtful
accounts was nil as at December 31, 2012 and December 31, 2011. ARC did not record any additional provisions for non-collectable
accounts receivable during the years ended December 31, 2012 and 2011.



When determining whether amounts
that are past due are collectable, management assesses the credit worthiness and past payment history of the counterparty, as well
as the nature of the past due amount. ARC considers all amounts greater than 90 days to be past due. As at December 31, 2012, $4.4
million of accounts receivable are past due, all of which are considered to be collectable ($2.9 million at December 31, 2011).



Maximum credit risk is calculated
as the total recorded value of cash and cash equivalents, accounts receivable, reclamation fund, short-term investments, and risk
management contracts at the balance sheet date.











| | 8. | RECLAMATION FUND
| | -- | ----------------



|                                                  |  | December 31, 2012 |      |   | December 31, 2011 |  
|------------------------------------------------- |  | ----------------- | ---- | - | ----------------- | -
|Balance, beginning of year                        |  | $                 | 26.9 |   |                   | $
|Contributions                                     |  |                   | 4.4  |   |                   |  
|Reimbursed expenditures (1)                       |  |                   | (1.8 | ) |                   |  
|Interest earned on funds                          |  |                   | 0.3  |   |                   |  
|Net unrealized gains on available-for-sale-assets |  |                   | -    |   |                   |  
|Balance, end of year (2)                          |  | $                 | 29.8 |   |                   | $



| | (1) | Amount differs from actual expenditures incurred by ARC due to timing differences and discretionary
reimbursements.
| | --- | -------------------------------------------------------------------------------------------------------------------

| | (2) | As at December 31, 2012 the restricted reclamation fund held the balance in investment grade assets.
| | --- | ----------------------------------------------------------------------------------------------------



ARC has established a restricted
reclamation fund to finance obligations specifically associated with one of its assets. Required contributions to this fund will
vary over time and have been disclosed as commitments in Note 19. Interest earned on the respective investments is retained within
the fund.



| | 9. | INTANGIBLE EXPLORATION AND EVALUATION ASSETS
| | -- | --------------------------------------------



The following table
reconciles ARC’s E&E assets:



|                           |  | E&E |      
|-------------------------- |  | --- | -----
|Balance, December 31, 2010 |  | $   | 74.4 
|Additions                  |  |     | 113.3
|Balance, December 31, 2011 |  | $   | 187.7
|Additions                  |  |     | 50.4 
|Balance, December 31, 2012 |  | $   | 238.1



| | 10. | PROPERTY, PLANT AND EQUIPMENT
| | --- | -----------------------------



The following table reconciles
ARC’s property, plant and equipment:



|Cost                                                             |  | Development and Production Assets |          |   | Administrative Assets |  
|---------------------------------------------------------------- |  | --------------------------------- | -------- | - | --------------------- | -
|Balance, December 31, 2010                                       |  | $                                 | 4,699.3  |   |                       | $
|Additions                                                        |  |                                   | 818.3    |   |                       |  
|Assets reclassified as held for sale                             |  |                                   | (13.0    | ) |                       |  
|Balance, December 31, 2011                                       |  | $                                 | 5,504.6  |   |                       | $
|Additions                                                        |  |                                   | 624.4    |   |                       |  
|Assets reclassified as held for sale                             |  |                                   | (5.0     | ) |                       |  
|Assets reclassified from held for sale                           |  |                                   | 5.3      |   |                       |  
|Balance, December 31, 2012                                       |  | $                                 | 6,129.3  |   |                       | $
|                                                                 |  |                                   |          |   |                       |  
|Accumulated depletion, depreciation, amortization and impairment |  |                                   |          |   |                       |  
|Balance, December 31, 2010                                       |  | $                                 | (394.4   | ) |                       | $
|Depletion, depreciation and amortization                         |  |                                   | (430.6   | ) |                       |  
|Impairment (Note 5)                                              |  |                                   | (71.9    | ) |                       |  
|Accumulated depletion reclassified as held for sale              |  |                                   | 1.7      |   |                       |  
|Balance, December 31, 2011                                       |  | $                                 | (895.2   | ) |                       | $
|Depletion, depreciation and amortization                         |  |                                   | (511.6   | ) |                       |  
|Impairment (Note 5)                                              |  |                                   | (53.0    | ) |                       |  
|Accumulated depletion reclassified as held for sale              |  |                                   | 0.6      |   |                       |  
|Accumulated depletion reclassified from held for sale            |  |                                   | (0.7     | ) |                       |  
|Balance, December 31, 2012                                       |  | $                                 | (1,459.9 | ) |                       | $
|                                                                 |  |                                   |          |   |                       |  
|Carrying amounts                                                 |  |                                   |          |   |                       |  
|As at December 31, 2011                                          |  | $                                 | 4,609.4  |   |                       | $
|As at December 31, 2012                                          |  | $                                 | 4,669.4  |   |                       | $











For the year ended December 31,
2012 $27.9 million (2011 - $25.7 million) of direct and incremental general and administrative expenses were capitalized to property,
plant and equipment.



In the year ended December 31,
2011 ARC disposed of $130.6 million of PP&E that was classified as held for sale of which $123.9 million was classified as
held for sale as at December 31, 2010. Gains totaling $89.5 million were recognized in the statement of income in respect of these
disposals.



|Assets held for sale                              |  |   |       
|------------------------------------------------- |  | - | ------
|Balance, December 31, 2010                        |  | $ | 123.9 
|Additions                                         |  |   | 11.3  
|Disposals                                         |  |   | (130.6
|Balance, December 31, 2011                        |  | $ | 4.6   
|Additions                                         |  |   | 4.4   
|Disposals                                         |  |   | (4.1  
|Reclassified to development and production assets |  |   | (4.6  
|Balance, December 31, 2012                        |  | $ | 0.3   



| | 11. | FINANCIAL LIABILITIES AND LIQUIDITY RISK
| | --- | ----------------------------------------



Liquidity risk is the risk that
ARC will not be able to meet its financial obligations as they become due. ARC actively manages its liquidity through strategies
such as continuously monitoring forecasted and actual cash flows from operating, financing and investing activities, available
credit under existing banking arrangements and opportunities to issue additional equity. Management believes that future cash flows
generated from these sources will be adequate to settle ARC’s financial liabilities.



The following table details ARC’s
financial liabilities as at December 31, 2012:



|                                             |  | Financial Liabilities |        
|-------------------------------------------- |  | --------------------- | -------
|($ millions)                                 |  | Carrying Amount       |        
|Accounts payable and accrued liabilities (1) |  |                       | 301.0  
|Dividends payable (2)                        |  |                       | 30.9   
|Risk management contracts (3)(4)             |  |                       | 10.8   
|Senior notes and interest (5)                |  |                       | 787.4  
|Accrued long-term incentive compensation (1) |  |                       | 24.5   
|Total financial liabilities                  |  |                       | 1,154.6



| | (1) | Cash obligations associated with the RSU & PSU Plans represent the total amount expected to
be paid out on vesting. Additional vesting of awards will be accrued in subsequent years.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Amounts payable for the dividend represent the net cash payable after dividend reinvestment.
| | --- | --------------------------------------------------------------------------------------------

| | (3) | Amounts payable under risk management contracts have been presented at their future value without
any reduction for entity-specific risk.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Risk management contracts are derivatives. All other financial liabilities contained in this table
are non-derivative liabilities.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

| | (5) | Cash obligation includes future interest payments.
| | --- | --------------------------------------------------



ARC actively maintains credit and working capital
facilities to ensure that it has sufficient available funds to meet its financial requirements at a reasonable cost. Refer to Note
12 for further details on available amounts under existing banking arrangements and Note 14 for further details on capital management.











| | 12. | LONG-TERM DEBT
| | --- | --------------



|                                 |  | December 31, 2012 |       |  | December 31, 2011 |  
|-------------------------------- |  | ----------------- | ----- |  | ----------------- | -
|Syndicated credit facilities:    |  |                   |       |  |                   |  
|Cdn$ denominated                 |  | $                 | -     |  |                   | $
|Working capital facility         |  |                   | -     |  |                   |  
|Senior notes:                    |  |                   |       |  |                   |  
|Master Shelf Agreement:          |  |                   |       |  |                   |  
|5.42% US$ Note                   |  |                   | 46.6  |  |                   |  
|4.98% US$ Note                   |  |                   | 49.7  |  |                   |  
|2004 Note Issuance               |  |                   |       |  |                   |  
|4.62% US$ Note                   |  |                   | 12.8  |  |                   |  
|5.10% US$ Note                   |  |                   | 19.1  |  |                   |  
|2009 Note Issuance               |  |                   |       |  |                   |  
|7.19% US$ Note                   |  |                   | 53.7  |  |                   |  
|8.21% US$ Note                   |  |                   | 34.8  |  |                   |  
|6.50% Cdn$ Note                  |  |                   | 23.2  |  |                   |  
|2010 Note Issuance               |  |                   |       |  |                   |  
|5.36% US$ Note                   |  |                   | 149.2 |  |                   |  
|2012 Note Issuance               |  |                   |       |  |                   |  
|3.31% US$ Note                   |  |                   | 59.7  |  |                   |  
|3.81% US$ Note                   |  |                   | 298.6 |  |                   |  
|4.49% Cdn$ Note                  |  |                   | 40.0  |  |                   |  
|Total long-term debt outstanding |  | $                 | 787.4 |  |                   | $



Credit Facilities

ARC has a $1 billion, annually
extendible, financial covenant-based syndicated credit facility (“the facility”). The current maturity date of the
facility is August 3, 2016. ARC also has in place a $25 million demand working capital facility and a $25 million letter of credit
facility. Both the working capital facility and the letter of credit facility are subject to the same covenants as the syndicated
credit facility.



Borrowings under the facility
bear interest at Canadian bank prime (three per cent at both December 31, 2012 and 2011) or US base rate, or, at ARC’s option,
Canadian dollar bankers’ acceptances or US dollar LIBOR loan rates, plus applicable margin and stamping fee. The total stamping
fees range between 160 bps and 325 bps on Canadian bank prime and US base rate borrowings and between 60 bps and 225 bps on Canadian
dollar bankers’ acceptance and US dollar LIBOR borrowings. The undrawn portion of the facility is subject to a standby fee
in the range of 32 to 65 bps.



The weighted average interest
rate under the credit facility was two per cent for the year ended December 31, 2012 (three per cent for the year ended December
31, 2011).



At December 31, 2011, an amount
of $3.9 million due under ARC’s working capital facility in the following 12 months had not been included in current liabilities
as ARC has the ability and intent to refinance these amounts through the syndicated credit facility.



Senior Notes Issued
Under a Master Shelf Agreement

These senior notes were issued
in two separate tranches pursuant to an Uncommitted Master Shelf Agreement. The terms and rates of these senior notes are summarized
below.



|Issue Date        |  | Remaining Principal |  | Coupon Rate |  | Maturity Date     |  | Principal Payment Terms                             
|----------------- |  | ------------------- |  | ----------- |  | ----------------- |  | ----------------------------------------------------
|December 15, 2005 |  | US$46.9 million     |  | 5.42%       |  | December 15, 2017 |  | Eight equal installments beginning December 15, 2010
|March 5, 2010     |  | US$50 million       |  | 4.98%       |  | March 5, 2019     |  | Five equal installments beginning March 5, 2015     











Senior Notes Not
Subject to the Master Shelf Agreement

The senior notes not subject
to the Master Shelf Agreement were issued via private placements. The terms and rates of these senior notes are summarized below.



|Issue Date      |  | Remaining Principal |  | Coupon
        Rate |  | Maturity Date   |  | Principal Payment Terms                          
|--------------- |  | ------------------- |  | ------------------- |  | --------------- |  | -------------------------------------------------
|April 27, 2004  |  | US$12.8 million     |  | 4.62%               |  | April 27, 2014  |  | Six equal installments beginning April 27, 2009  
|April 27, 2004  |  | US$19.2 million     |  | 5.10%               |  | April 27, 2016  |  | Five equal installments beginning April 27, 2012 
|April 14, 2009  |  | US$54.0 million     |  | 7.19%               |  | April 14, 2016  |  | Five equal installments beginning April 14, 2012 
|April 14, 2009  |  | US$35.0 million     |  | 8.21%               |  | April 14, 2021  |  | Five equal installments beginning April 14, 2017 
|April 14, 2009  |  | Cdn$23.2 million    |  | 6.50%               |  | April 14, 2016  |  | Five equal installments beginning April 14, 2012 
|May 27, 2010    |  | US$150.0 million    |  | 5.36%               |  | May 27, 2022    |  | Five equal installments beginning May 27, 2018   
|August 23, 2012 |  | US$60.0 million     |  | 3.31%               |  | August 23, 2021 |  | Five equal installments beginning August 23, 2017
|August 23, 2012 |  | US$300.0 million    |  | 3.81%               |  | August 23, 2024 |  | Five equal installments beginning August 23, 2020
|August 23, 2012 |  | Cdn$40.0 million    |  | 4.49%               |  | August 23, 2024 |  | Five equal installments beginning August 23, 2020



Credit Capacity

The following table summarizes
ARC’s available credit capacity and the current amounts drawn as at December 31, 2012:



|                                                     |  | Credit Capacity |         |  | Drawn |   |       | Remaining | 
|---------------------------------------------------- |  | --------------- | ------- |  | ----- | - | ----- | --------- | 
|Syndicated credit facility                           |  | $               | 1,000.0 |  |       | $ | -     |           | 
|Working capital facility                             |  |                 | 25.0    |  |       |   | -     |           | 
|Senior Notes subject to a Master Shelf Agreement(1)  |  |                 | 223.9   |  |       |   | 96.3  |           | 
|Senior Notes not subject to a Master Shelf Agreement |  |                 | 691.1   |  |       |   | 691.1 |           | 
|Total                                                |  | $               | 1,940.0 |  |       | $ | 787.4 |           | 



| | (1) | Total credit capacity is US$225 million.
| | --- | ----------------------------------------



Debt Covenants

The following are the significant
financial covenants governing the revolving credit facilities:



| | · | Long-term debt and letters of credit not
to exceed three times trailing twelve month net income before non-cash items and interest expense;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| | · | Long-term debt, letters of credit, and
subordinated debt not to exceed four times trailing twelve month net income before non-cash items and interest expense; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Long-term debt and letters of credit not
to exceed 50 per cent of the book value of shareholders’ equity and long-term debt, letters of credit, and subordinated debt.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



In the event that ARC enters
into a material acquisition whereby the purchase price exceeds 10 per cent of the book value of ARC’s assets, the ratio in
the first covenant is increased to 3.5 times, while the third covenant is increased to 55 per cent for the subsequent six month
period. As at December 31, 2012, ARC had $9.1 million in letters of credit ($12.9 million dollars in 2011), no subordinated debt,
and was in compliance with all covenants.



The fair value of all senior
notes as at December 31, 2012, is $827.9 million compared to a carrying value of $787.4 million ($467.1 million compared to $437.8
million as at December 31, 2011).











| | 13. | ASSET RETIREMENT OBLIGATIONS
| | --- | ----------------------------



The total future asset retirement
obligations were estimated by management based on ARC’s net ownership interest in all wells and facilities, estimated costs
to reclaim and abandon the wells and facilities and the estimated timing of the costs to be incurred in future periods. ARC has
estimated the net present value of its total asset retirement obligations to be $532.9 million as at December 31, 2012 ($496.4
million at December 31, 2011) based on a total future undiscounted liability of $1.39 billion ($1.37 billion at December 31, 2011).
At December 31, 2012 management estimates that these payments are expected to be made over the next 60 years with the majority
of payments being made in years 2061 to 2072. The Bank of Canada’s long term bond rate of 2.36 per cent (2.5 per cent in
2011) and an inflation rate of two per cent (two per cent in 2011) were used to calculate the present value of the asset retirement
obligations.



The following table
reconciles ARC’s provision for asset retirement obligations:



|                                                                         |  | Year Ended December 31, 2012 |       |   | Year Ended December 31, 2011 |  
|------------------------------------------------------------------------ |  | ---------------------------- | ----- | - | ---------------------------- | -
|Balance, beginning of year                                               |  | $                            | 496.4 |   |                              | $
|Increase in liabilities relating to development activities               |  |                              | 5.9   |   |                              |  
|Increase in liabilities relating to change in estimate and discount rate |  |                              | 29.7  |   |                              |  
|Settlement of reclamation liabilities during the period                  |  |                              | (11.9 | ) |                              |  
|Accretion expense                                                        |  |                              | 12.4  |   |                              |  
|Reclassified as liabilities associated with assets held for sale         |  |                              | 0.4   |   |                              |  
|Balance, end of year                                                     |  | $                            | 532.9 |   |                              | $



| | 14. | CAPITAL MANAGEMENT
| | --- | ------------------



ARC’s objective when managing
its capital is to maintain a conservative structure that will allow it to:

| | · | Fund its development and exploration program;
| | - | ---------------------------------------------

| | · | Provide financial flexibility to execute
on strategic opportunities; and
| | - | ------------------------------------------------------------------------

| | · | Maintain a dividend policy that, in normal
times, in the opinion of Management and the Board of Directors, is sustainable for a minimum period of six months in order to normalize
the effect of commodity price volatility to shareholders.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ARC manages the following capital:

| | · | Common shares and
| | - | -----------------

| | · | Net debt, which includes long-term debt
and working capital deficit (surplus), if any. Working capital deficit (surplus) is calculated as current liabilities less current
assets, and excludes current unrealized amounts pertaining to risk management contracts, assets held for sale and asset retirement
obligations contained within liabilities associated with assets held for sale.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



When evaluating ARC’s capital
structure, management’s objective is to target net debt between one to 1.5 times annualized funds from operations and less
than 20 per cent of total capitalization. As at December 31, 2012 ARC’s net debt to funds from operations ratio is 1.0 and
its net debt to total capitalization ratio is 9.0 per cent.



|($ millions)                                 |  | Year Ended December 31, 2012 |       |  | Year Ended December 31, 2011 | 
|-------------------------------------------- |  | ---------------------------- | ----- |  | ---------------------------- | 
|Cash from operating activities               |  |                              | 703.5 |  |                              | 
|Net change in other liabilities (Note 21)    |  |                              | 10.6  |  |                              | 
|Change in non-cash working capital (Note 21) |  |                              | 5.7   |  |                              | 
|Funds from operations                        |  |                              | 719.8 |  |                              | 











|($ millions, except per share and per cent amounts)                                         |  | December 31, 2012 |         |   | December 31, 2011 | 
|------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | 
|Long-term debt (1)                                                                          |  |                   | 787.4   |   |                   | 
|Accounts payable and accrued liabilities                                                    |  |                   | 301.0   |   |                   | 
|Dividends payable                                                                           |  |                   | 30.9    |   |                   | 
|Financial liabilities associated with assets held for sale                                  |  |                   | -       |   |                   | 
|Cash and cash equivalents, accounts receivable, prepaid expenses, and short-term investment |  |                   | (373.7  | ) |                   | 
|Net debt obligations                                                                        |  |                   | 745.6   |   |                   | 
|                                                                                            |  |                   |         |   |                   | 
|Shares outstanding (millions)                                                               |  |                   | 308.9   |   |                   | 
|Share price (2)                                                                             |  |                   | 24.44   |   |                   | 
|Market capitalization                                                                       |  |                   | 7,549.5 |   |                   | 
|Net debt obligations                                                                        |  |                   | 745.6   |   |                   | 
|Total capitalization                                                                        |  |                   | 8,295.1 |   |                   | 
|                                                                                            |  |                   |         |   |                   | 
|Net debt as a percentage of total capitalization                                            |  |                   | 9.0     | % |                   | 
|Net debt to funds from operations                                                           |  |                   | 1.0     |   |                   | 



| | (1) | Includes current portion of long-term debt at December 31, 2012 and 2011 of $39.7 million and $40.5
million respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (2) | TSX closing price as at December 31, 2012 and December 31, 2011 respectively.
| | --- | -----------------------------------------------------------------------------



ARC manages its capital structure
and makes adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets.
ARC is able to change its capital structure by issuing new shares, new debt or changing its dividend policy.



In addition to internal capital
management, ARC is subject to various covenants under its credit facilities. Compliance with these covenants is monitored on a
quarterly basis and as at December 31, 2012 ARC is in compliance with all covenants.



| | 15. | FINANCIAL INSTRUMENTS AND MARKET RISK MANAGEMENT
| | --- | ------------------------------------------------



Financial Instrument Classification
and Measurement

ARC’s financial instruments
on the Consolidated Balance Sheet are carried at amortized cost with the exception of cash and cash equivalents, short-term investment,
reclamation fund assets and risk management contracts, which are carried at fair value. With the exception of ARC’s senior
notes, there were no significant differences between the carrying value of financial instruments and their estimated fair values
as at December 31, 2012. The fair value of the ARC’s senior notes is disclosed in Note 12.



All of ARC’s cash and cash
equivalents, short-term investment, risk management contracts, and reclamation fund assets are transacted in active markets. ARC
classifies the fair value of these transactions according to the following hierarchy based on the amount of observable inputs used
to value the instrument.



| | · | Level 1 – Quoted prices are available
in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions
occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Level 2 – Pricing inputs are other
than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of
the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility
factors, which can be substantially observed or corroborated in the marketplace.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Level 3 – Valuations in this level
are those with inputs for the asset or liability that are not based on observable market data.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



ARC’s cash and cash equivalents,
reclamation fund assets and risk management contracts have been assessed on the fair value hierarchy described above. ARC’s
cash and cash equivalents and reclamation fund assets are classified as Level 1 and risk management contracts as Level 2. Assessment
of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the
fair value hierarchy level.



ARC holds an investment in a
junior oil and gas producing company that had an initial cost of $2.9 million. The short-term investment is classified as fair
value through profit and loss and is presented at fair value with any periodic change in fair value being recorded as an unrealized
gain or loss in the Consolidated Statements of Income. At December 31, 2012, the fair value of ARC’s investment was $1.7
million ($3.3 million at December 31, 2011) and an unrealized loss of $1.6 million was recorded for 2012 (loss of $0.2 million
in 2011). ARC classifies this investment as Level 1 in the fair value hierarchy.











Market Risk Management

ARC is exposed to a number of
market risks that are part of its normal course of business. ARC has a risk management program in place that includes financial
instruments as disclosed in the risk management contracts section of this note.



ARC’s risk management program
is overseen by its Risk Committee based on guidelines approved by the Board of Directors. The objective of the risk management
program is to support ARC’s business plan by mitigating adverse changes in commodity prices, interest rates and foreign exchange
rates.



In the sections below, ARC has
prepared sensitivity analyses in an attempt to demonstrate the effect of changes in these market risk factors on ARC’s net
income. For the purposes of the sensitivity analyses, the effect of a variation in a particular variable is calculated independently
of any change in another variable. In reality, changes in one factor may contribute to changes in another, which may magnify or
counteract the sensitivities.



Commodity Price Risk

ARC’s operational results
and financial condition are largely dependent on the commodity prices received for its oil and natural gas production. Commodity
prices have fluctuated widely during recent years due to global and regional factors including supply and demand fundamentals,
inventory levels, weather, economic, and geopolitical factors. Movement in commodity prices could have a significant positive or
negative impact on ARC’s net income.



ARC manages the risks associated
with changes in commodity prices by entering into a variety of risk management contracts (see Risk Management Contracts below).
The following table illustrates the effects of movement in commodity prices on net income due to changes in the fair value of risk
management contracts in place at December 31, 2012. The sensitivity is based on a US$10 increase and decrease in the price of WTI,
a US$0.50 increase and decrease in the price of NYMEX natural gas, a five per cent increase and 10 per cent decrease in AECO basis
relative to NYMEX, and a Cdn$20 increase and Cdn$10 decrease in the AESO Power price. The commodity price assumptions are based
on management’s assessment of reasonably possible changes in oil and natural gas prices that could occur between December
31, 2012 and ARC’s next reporting date.



|Sensitivity of Commodity Price Risk Management Contracts
|--------------------------------------------------------
|                                                        
|                                                        
|Net income (decrease) increase                          



As noted above, the sensitivities
are hypothetical and based on management’s assessment of reasonably possible changes in commodity prices between the balance
sheet date and ARC’s next reporting date. The results of the sensitivity should not be considered to be predictive of future
performance. Changes in the fair value of risk management contracts cannot generally be extrapolated because the relationship of
change in certain variables to a change in fair value may not be linear.



Interest Rate Risk

ARC has both fixed and variable
interest rates on its debt. Changes in interest rates could result in an increase or decrease in the amount ARC pays to service
variable interest rate debt. Changes in interest rates could also result in fair value risk on ARC’s fixed rate senior notes.
Fair value risk of the senior notes is mitigated due to the fact that ARC generally does not intend to settle its fixed rate debt
prior to maturity.



Foreign Exchange Risk

North American oil and natural
gas prices are based upon US dollar denominated commodity prices. As a result, the price received by Canadian producers is affected
by the Cdn$/US$ foreign exchange rate that may fluctuate over time. In addition ARC has US dollar denominated debt and interest
obligations of which future cash repayments are directly impacted by the exchange rate in effect on the repayment date.



The following table demonstrates
the effect of exchange rate movements on net income due to changes in the fair value of risk management contracts in place at December
31, 2012 as well as the unrealized gain or loss on revaluation of outstanding US dollar denominated debt. The sensitivity is based
on a 10 per cent increase and 10 per cent decrease in the Cdn$/US$ foreign exchange rate and excludes the impact on revenue proceeds.











|Sensitivity of Foreign Exchange Exposure |  | Increase in Cdn$/US$ rate |       |   | Decrease in Cdn$/US$ rate |  
|---------------------------------------- |  | ------------------------- | ----- | - | ------------------------- | -
|Risk management contracts                |  | $                         | (0.2  | ) |                           | $
|US dollar denominated debt               |  |                           | (14.6 | ) |                           |  
|Net income (decrease) increase           |  | $                         | (14.8 | ) |                           | $



Increases and decreases in foreign
exchange rates applicable to US dollar denominated payables and receivables would have a nominal impact on ARC’s net income
for the period ended December 31, 2012.



Risk Management
Contracts

ARC uses a variety of derivative
instruments to reduce its exposure to fluctuations in commodity prices, foreign exchange rates, interest rates and power prices.



Following is a summary of all
risk management contracts in place as at December 31, 2012:



|Financial WTI Crude Oil Contracts
|---------------------------------
|                                 
|Term                             
|1-Jan-13                         
|1-Jan-13                         
|1-Jan-13                         
|1-Jan-13                         
|1-Jan-13                         
|1-Jul-13                         

| | (1) | Settled on the monthly average price.
| | --- | -------------------------------------

| | (2) | Settled on the term average price.
| | --- | ----------------------------------



|Financial WTI Crude Oil Swap Contracts
|--------------------------------------
|                                      
|Term                                  
|1-Jan-13                              

| | (3) | Settled on the monthly average price.
| | --- | -------------------------------------



|Financial WTI Crude Oil First vs Second Month Calendar Spread Contracts(4)
|--------------------------------------------------------------------------
|                                                                          
|Term                                                                      
|1-Jan-13                                                                  
|1-Jan-13                                                                  
|1-Jan-14                                                                  

| | (4) | ARC receives the second delivery month contract average plus the calendar spread; ARC pays the prompt contract monthly average.
| | --- | -------------------------------------------------------------------------------------------------------------------------------



|Financial NYMEX Natural Gas Swap Contracts(5)
|---------------------------------------------
|                                             
|Term                                         
|1-Jan-13                                     

| | (5) | Last Day Settlement.
| | --- | --------------------



|Financial NYMEX Natural Gas Contracts(6)
|----------------------------------------
|                                        
|Term                                    
|1-Jan-13                                
|1-Jan-13                                
|1-Jan-13                                
|1-Apr-13                                
|1-Jan-14                                
|1-Jan-14                                

| | (6) | Last Day Settlement.
| | --- | --------------------













|Financial AECO Basis Swap Contracts
|-----------------------------------
|                                   
|Term                               
|1-Jan-13                           
|1-Jan-15                           

| | (7) | ARC receives NYMEX price based on Last Day (LD) settlement multiplied by AECO/NYMEX US$/mmbtu ratio; ARC pays AECO (7a) monthly
index US$/mmbtu.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------



|Financial Electricity Heat Rate Contracts(8)
|--------------------------------------------
|                                            
|Term                                        
|1-Jan-13                                    

| | (8) | ARC pays AECO (5a) x Heat Rate; ARC receives floating AESO power price.
| | --- | -----------------------------------------------------------------------



At December 31, 2012, the net
fair value associated with ARC’s risk management contracts was $21.8 million ($2.8 million at December 31, 2011). ARC recorded
gains on risk management contracts of $80.6 million for the year ended December 31, 2012 in its consolidated income statement (gains
of $59.3 million for the year ended December 31, 2011).



| | 16. | INCOME TAXES
| | --- | ------------



The tax provision differs from
the amount computed by applying the combined Canadian federal and provincial statutory income tax rates to income before deferred
income tax expense as follows:



|                                               |  | December 31, 2012 |       |   | December 31, 2011 |  
|---------------------------------------------- |  | ----------------- | ----- | - | ----------------- | -
|Income before tax                              |  | $                 | 188.4 |   |                   | $
|Canadian statutory rate(1)                     |  |                   | 25.0  | % |                   |  
|Expected income tax expense at statutory rates |  |                   | 47.1  |   |                   |  
|Effect on income tax of:                       |  |                   |       |   |                   |  
|Effect of change in corporate tax rate         |  |                   | -     |   |                   |  
|Unrealized loss on foreign exchange            |  |                   | 0.1   |   |                   |  
|Change in estimated pool balances              |  |                   | 2.8   |   |                   |  
|Other                                          |  |                   | (0.8  | ) |                   |  
|Income tax expense                             |  | $                 | 49.2  |   |                   | $

| | (1) | The statutory rate consists of the combined statutory tax rate for the Company and its subsidiaries
for the years ended December 31, 2012 and December 31, 2011. The general combined Federal/Provincial tax rate lowered to 25.0%
in 2012 from 26.5% in 2011 due to the Federal rate dropping from 16.5% in 2011 to 15.0% in 2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                         |  | December 31, 2012 |        |   | December 31, 2011 |  
|---------------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|Deferred taxes liabilities:              |  |                   |        |   |                   |  
|Capital assets in excess of tax value    |  | $                 | 651.9  |   |                   | $
|Risk management contracts                |  |                   | 8.2    |   |                   |  
|Long-term debt                           |  |                   | 6.1    |   |                   |  
|Partnership deferral                     |  |                   | 12.9   |   |                   |  
|                                         |  |                   |        |   |                   |  
|Deferred tax assets:                     |  |                   |        |   |                   |  
|Asset retirement obligations             |  |                   | (133.6 | ) |                   |  
|Non-capital losses                       |  |                   | -      |   |                   |  
|Risk management contracts                |  |                   | (2.7   | ) |                   |  
|Long-term incentive compensation expense |  |                   | (13.1  | ) |                   |  
|Attributed Canadian royalty income       |  |                   | -      |   |                   |  
|Other                                    |  |                   | (7.4   | ) |                   |  
|Deferred taxes                           |  | $                 | 522.3  |   |                   | $











A continuity of deferred taxes is detailed
in the following tables:



|($ millions)                             |  | Balance December 31,2011 Asset (Liability) |        |   | Recognized in Profit or Loss Asset (Liability) |  |       | Recognized in Equity Asset (Liability) |  |  | Recognized in Property, Plant and Equipment Asset (Liability) |  |  | Balance December 31, 2012 Asset (Liability) |     
|---------------------------------------- |  | ------------------------------------------ | ------ | - | ---------------------------------------------- |  | ----- | -------------------------------------- |  |  | ------------------------------------------------------------- |  |  | ------------------------------------------- | ----
|                                         |  |                                            |        |   |                                                |  |       |                                        |  |  |                                                               |  |  |                                             |     
|Property, plant and equipment            |  |                                            | (610.9 | ) |                                                |  | (40.8 | )                                      |  |  | -                                                             |  |  |                                             | (0.2
|Risk management contracts                |  |                                            | (0.7   | ) |                                                |  | (4.8  | )                                      |  |  | -                                                             |  |  |                                             | -   
|Long-term debt                           |  |                                            | (6.1   | ) |                                                |  | -     |                                        |  |  | -                                                             |  |  |                                             | -   
|Partnership deferral                     |  |                                            | (120.5 | ) |                                                |  | 107.6 |                                        |  |  | -                                                             |  |  |                                             | -   
|Asset retirement obligation              |  |                                            | 124.5  |   |                                                |  | 9.1   |                                        |  |  | -                                                             |  |  |                                             | -   
|Non-capital losses                       |  |                                            | 80.7   |   |                                                |  | (80.7 | )                                      |  |  | -                                                             |  |  |                                             | -   
|Long-term incentive compensation expense |  |                                            | 13.1   |   |                                                |  | -     |                                        |  |  | -                                                             |  |  |                                             | -   
|Attributed Canadian royalty income       |  |                                            | 4.5    |   |                                                |  | (4.5  | )                                      |  |  | -                                                             |  |  |                                             | -   
|Other                                    |  |                                            | 9.0    |   |                                                |  | (5.2  | )                                      |  |  | 3.6                                                           |  |  |                                             | -   
|Total                                    |  |                                            | (506.4 | ) |                                                |  | (19.3 | )                                      |  |  | 3.6                                                           |  |  |                                             | (0.2



The petroleum and natural gas properties and facilities
owned by ARC have an approximate federal tax basis of $2.4 billion ($2.7 billion in 2011) available for future use as deductions
from taxable income.



The following is a summary of
the estimated ARC tax pools:



|                                          |  | December 31, 2012 |         |  | December 31, 2011 |  
|----------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|Canadian oil and gas property expenses(1) |  | $                 | 826.0   |  |                   | $
|Canadian development expenses(1)          |  |                   | 875.8   |  |                   |  
|Canadian exploration expenses(1)          |  |                   | 22.9    |  |                   |  
|Undepreciated capital costs               |  |                   | 595.8   |  |                   |  
|Non-capital losses                        |  |                   | -       |  |                   |  
|SR&ED tax pools                           |  |                   | -       |  |                   |  
|Other                                     |  |                   | 29.3    |  |                   |  
|Estimated tax basis, federal              |  |                   | 2,349.8 |  |                   |  
|Provincial tax pools                      |  |                   | 28.1    |  |                   |  

| | (1) | The tax pools presented reflect the application of partnership deferral rules. There is a deferral of partnership income
                                                                 of                                                                  $51.6
                                                                 million                                                                                                         inherent in
                                                                 the                                                                  income
                                                                 tax                                                                                                         calculation for
                                                                 the                                                                                                   year
                                                                 ended December 31, 2012. This                                                                  deferral, as available
                                                                 under Canadian income tax legislation utilizes
                                                                 $118 million of the income tax pools in the table above.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the year ended December 31,
2012, ARC incurred current tax expense of $29.9 million. No current taxes were incurred in the year ended December 31, 2011.











| | 17. | SHAREHOLDERS’ CAPITAL
| | --- | ---------------------



|(thousands of shares)            |  | Year Ended December 31, 2012 |         |  | Year Ended December 31, 2011 | 
|-------------------------------- |  | ---------------------------- | ------- |  | ---------------------------- | 
|Common shares, beginning of year |  |                              | 288,895 |  |                              | 
|Equity offering                  |  |                              | 14,588  |  |                              | 
|Dividend reinvestment program    |  |                              | 5,405   |  |                              | 
|Common shares, end of year       |  |                              | 308,888 |  |                              | 



Net income per common share has
been determined based on the following:



|(thousands of shares)            |  | Year Ended December 31, 2012 |         |  | Year Ended December 31, 2011 | 
|-------------------------------- |  | ---------------------------- | ------- |  | ---------------------------- | 
|Weighted average common shares   |  |                              | 297,161 |  |                              | 
|Dilutive impact of share options |  |                              | 81      |  |                              | 
|Diluted common shares            |  |                              | 297,242 |  |                              | 



On August 22, 2012, ARC issued 14,587,750 common shares
at a price of $23.65 per share for aggregate gross proceeds of $345 million. Share issue costs of $14.3 million were incurred as
a result of this transaction.



Dividends for the years ended December 31, 2012 and
2011 were $1.20 per share.



On January 16, 2013 the Board of Directors declared
a monthly dividend of $0.10 per common share, payable in cash, to shareholders of record on January 31, 2013. The dividend payment
date is February 15, 2013.



| | 18. | LONG TERM INCENTIVE PLANS
| | --- | -------------------------



RSU & PSU Plan

ARC’s share-based Long-Term
Incentive Plan (RSU & PSU Plan) results in employees, officers and directors (the “plan participants”) receiving
cash compensation in relation to the value of a specified number of underlying notional share units. The RSU & PSU Plan consists
of Restricted Share Units (“RSUs”) for which the number of share units is fixed and will vest evenly over a period
of three years and Performance Share Units (“PSUs”) for which the number of share units is variable and will vest at
the end of three years.



Upon vesting of the RSUs, the
plan participant receives a cash payment based on the fair value of the underlying share units plus all dividends accrued since
the grant date. The cash compensation of the PSUs issued upon vesting is further dependent upon an adjustment to the final number
of PSU awards that eventually vest based on a performance multiplier. The performance multiplier is calculated using the percentile
rank of ARC’s Total Shareholder Return relative to its peers and can result in cash compensation issued upon vesting of the
PSUs ranging from zero to two times the value of the PSUs originally granted.



A portion of total compensation
costs associated with the RSU & PSU Plan is charged to property, plant and equipment to reflect those costs that are directly
attributable to spending on capital projects, a portion is charged to operating expenses to reflect the awards that are attributable
to certain individuals working in field operations, and the remainder is charged to general and administrative expense.



DSU Plan

ARC offers a DSU Plan to non-employee
directors, under which each director receives a minimum of 55 per cent of their total annual remuneration in the form of DSUs.
Each DSU fully vests on the date of grant, but is distributed only when the director has ceased to be a member of the Board of
Directors of the Company. Compensation expense associated with the DSU Plan is based on the fair value of DSUs at the date of grant,
adjusted to the current fair value of outstanding awards at each period end. Units are settled in cash based on the common share
price plus accrued dividends. Compensation expense relating to the DSU Plan is charged to general and administrative expense.











The following table summarizes
the RSU, PSU and DSU movement for the year ended December 31, 2012:



|(number of units, thousands) |  | RSUs |      |   | PSUs |  |       | DSUs | 
|---------------------------- |  | ---- | ---- | - | ---- |  | ----- | ---- | 
|Balance, beginning of period |  |      | 852  |   |      |  | 1,445 |      | 
|Granted                      |  |      | 354  |   |      |  | 572   |      | 
|Distributed                  |  |      | (443 | ) |      |  | (517  | )    | 
|Forfeited                    |  |      | (67  | ) |      |  | (99   | )    | 
|Balance, end of period       |  |      | 696  |   |      |  | 1,401 |      | 



Compensation charges relating
to the RSU & PSU and DSU Plans can be reconciled as follows:



|                                   |  | Year Ended December 31, 2012 |      |  | Year Ended December 31, 2011 |  
|---------------------------------- |  | ---------------------------- | ---- |  | ---------------------------- | -
|General and administrative expense |  |                              | 32.4 |  |                              |  
|Operating expense                  |  |                              | 4.8  |  |                              |  
|Property, plant and equipment      |  |                              | 3.4  |  |                              |  
|Total compensation charges         |  | $                            | 40.6 |  |                              | $
|Cash payments                      |  | $                            | 40.9 |  |                              | $



At December 31, 2012 $28.6 million
of compensation amounts payable were included in accounts payable and accrued liabilities on the Consolidated Balance Sheet ($35
million at December 31, 2011), and $24.5 million was included in long-term incentive compensation liability ($18.5 million at December
31, 2011). A recoverable amount of $0.8 million was included in accounts receivable at December 31, 2012 ($0.9 million at December
31, 2011).



Share Option Plan

Share options are granted to
officers, certain employees and certain consultants of ARC which vest evenly on the fourth and fifth anniversary of their grant
date and have a maximum term of seven years. The option holder has the right to exercise the options at the original grant price
or at a reduced exercise price, equal to the grant price less all dividends paid subsequent to the grant date and prior to the
exercise date.



ARC estimates the fair value
of share options granted using a binomial-lattice option pricing model. The grant date fair values of the share option plans were
$3.6 million, or $8.40 per option outstanding for the 2011 grant and $5.5 million, or $5.25 per option outstanding for the 2012
grant. The following assumptions were used to arrive at the estimated fair value at the date of the options grants:



|                                  |  | Year Ended December 31, 2012 |                 |  | Year Ended December 31, 2011 | 
|--------------------------------- |  | ---------------------------- | --------------- |  | ---------------------------- | 
|Grant date share price            |  |                              | $20.20 - $27.11 |  |                              | 
|Exercise price (1)                |  |                              | $19.60 - $25.01 |  |                              | 
|Expected annual dividends         |  |                              | $1.20           |  |                              | 
|Expected volatility (2)           |  |                              | 37.00% - 38.00% |  |                              | 
|Risk-free interest rate           |  |                              | 1.39% - 2.61%   |  |                              | 
|Expected life of share option (3) |  |                              | 5.5 to 6 years  |  |                              | 

| | (1) | Exercise price is reduced monthly by the amount of dividend declared.
| | --- | ---------------------------------------------------------------------

| | (2) | Expected volatility is determined by the average price volatility of the common shares/trust units
over the past 7 years.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (3) | Expected life of the share option is calculated as the mid-point between vesting date and expiry.
| | --- | -------------------------------------------------------------------------------------------------



ARC recorded compensation expense
of $1 million relating to the share option plan for the year ended December 31, 2012 ($0.5 million at December 31, 2011).



The number of share options outstanding
and related exercise prices are as follows:



|                             |  | Year ended December 31, 2012 |      
|---------------------------- |  | ---------------------------- | -----
|(number of units, thousands) |  | Share options                |      
|Balance, beginning of period |  |                              | 419  
|Granted                      |  |                              | 1,056
|Forfeited                    |  |                              | (55  
|Balance, end of period       |  |                              | 1,420
|Exercisable, end of period   |  |                              | -    











| | 19. | COMMITMENTS AND CONTINGENCIES
| | --- | -----------------------------



Following is a summary of ARC’s contractual
obligations and commitments as at December 31, 2012:



|                                      |  | Payments Due by Period |      
|------------------------------------- |  | ---------------------- | -----
|($ millions)                          |  | 1 year                 |      
|Debt repayments (1)                   |  |                        | 39.7 
|Interest payments (2)                 |  |                        | 37.0 
|Reclamation fund contributions (3)    |  |                        | 4.0  
|Purchase commitments                  |  |                        | 47.8 
|Transportation commitments            |  |                        | 42.8 
|Operating leases                      |  |                        | 14.7 
|Risk management contract premiums (4) |  |                        | 0.5  
|Total contractual obligations         |  |                        | 186.5

| | (1) | Long-term and short-term debt.
| | --- | ------------------------------

| | (2) | Fixed interest payments on senior notes.
| | --- | ----------------------------------------

| | (3) | Contribution commitments to a restricted reclamation fund associated with the Redwater property.
| | --- | ------------------------------------------------------------------------------------------------

| | (4) | Fixed premiums to be paid in future periods on certain commodity risk management contracts.
| | --- | -------------------------------------------------------------------------------------------



In addition to the above risk
management contract premiums, ARC has commitments related to its risk management program (see Note 15). As the premiums are part
of the underlying risk management contract, they have been recorded at fair market value at December 31, 2012 on the balance sheet
as part of risk management contracts.



ARC enters into commitments for
capital expenditures in advance of the expenditures being made. At a given point in time, it is estimated that ARC has committed
to capital expenditures equal to approximately one quarter of its current annual capital budget by means of giving the necessary
authorizations to incur the expenditures in a future period.



ARC is involved in litigation
and claims arising in the normal course of operations. Such claims are not expected to have a material impact on ARC’s results
of operations or cash flows.



| | 20. | RELATED PARTIES
| | --- | ---------------



Interest in Partnership

ARC owns a 99.99% interest in
the ARC Resources General Partnership (the “partnership”). The other 0.01% of the partnership is owned by 1504793 Alberta
Ltd, a 100% owned subsidiary of ARC. ARC’s oil and gas properties are owned and administered by the partnership. ARC is also
the sole beneficiary of the Redwater A&R Trust, which administers the reclamation fund on ARC’s behalf.



Key Management Personnel Compensation

ARC has determined that the key
management personnel of ARC consists of its officers and directors. In addition to the salaries and directors fees paid to the
officers and directors respectively, the Company also provides compensation to both groups under the Long-Term Incentive Plans.
As well, the officers participate in ARC’s share option plan. The compensation included in general and administrative expenses
relating to key management personnel for the year was $35.1 million (2011 - $26.7 million).



| | 21. | SUPPLEMENTAL DISCLOSURES
| | --- | ------------------------



Income Statement Presentation

ARC’s statement of income
is prepared primarily by nature of expense, with the exception of employee compensation costs which are included in both the operating
and general and administrative expense line items.



The following table details the amount of total employee
compensation costs included in the operating and general and administrative expense line items in the statement of income.



|                                  |  | Year Ended        |       |  | Year Ended        |  
|--------------------------------- |  | ----------------- | ----- |  | ----------------- | -
|                                  |  | December 31, 2012 |       |  | December 31, 2011 |  
|Operating                         |  | $                 | 28.9  |  |                   | $
|General and administrative        |  |                   | 88.5  |  |                   |  
|Total employee compensation costs |  | $                 | 117.4 |  |                   | $











Cash Flow Statement Presentation

The following tables provide
a detailed breakdown of certain line items contained within cash flow from operating activities.



|                                         |  | Year Ended        |      |   | Year Ended        |  
|---------------------------------------- |  | ----------------- | ---- | - | ----------------- | -
|Changes in Non-Cash Working Capital      |  | December 31, 2012 |      |   | December 31, 2011 |  
|Accounts receivable                      |  | $                 | 4.1  |   |                   | $
|Accounts payable and accrued liabilities |  |                   | (4.1 | ) |                   |  
|Prepaid expenses                         |  |                   | 1.2  |   |                   |  
|Total                                    |  |                   | 1.2  |   |                   |  
|                                         |  |                   |      |   |                   |  
|Operating activities                     |  |                   | (5.7 | ) |                   |  
|Investing activities                     |  |                   | 6.9  |   |                   |  
|Total                                    |  | $                 | 1.2  |   |                   | $



|                               |  | Year Ended        |      |   | Year Ended        |  
|------------------------------ |  | ----------------- | ---- | - | ----------------- | -
|Other Non-Cash Items           |  | December 31, 2012 |      |   | December 31, 2011 |  
|Non-cash lease inducement      |  | $                 | (2.2 | ) |                   | $
|Loss on short term investments |  |                   | 1.6  |   |                   |  
|Share option expense           |  |                   | 1.0  |   |                   |  
|Total other non-cash items     |  | $                 | 0.4  |   |                   | $



|                                           |  | Year Ended        |       |   | Year Ended        |  
|------------------------------------------ |  | ----------------- | ----- | - | ----------------- | -
|Net Change in Other Liabilities            |  | December 31, 2012 |       |   | December 31, 2011 |  
|Long-term incentive compensation liability |  | $                 | 6.0   |   |                   | $
|Risk management contracts                  |  |                   | (4.7  | ) |                   |  
|Asset retirement obligations               |  |                   | (11.9 | ) |                   |  
|Total other liabilities                    |  | $                 | (10.6 | ) |                   | $